Holding back a flood of new money?

By Karoun Demirjian (contact)

Sunday, March 17, 2013 | 2 a.m.

Nevadans have long complained that congressional inaction on matters such as online poker, energy legislation and immigration reform cost the state millions in lost tax revenues and economic opportunities.

But state lawmakers may have hit on their most quantifiable argument yet in pressuring Congress to pass a measure that lawmakers estimate would let the Silver State collect as much as $200 million a year in online sales taxes.

“We’re always looking in the sofa trying to find nickels to fund all our public services. ... We know the revenue boost it would mean to Nevada if this were to pass,” Sen. Minority Leader Michael Roberson said in an interview. “The big one is the Marketplace Fairness Act. ... They need to pass that.”

Roberson is referring to federal legislation to require online retailers to charge state and local sales taxes, whether or not the retailers maintain a physical presence in the state.

The Marketplace Fairness Act — previously known as the Main Street Fairness Act — was originally pitched in Congress not just as a revenue-generator for the states but, as the titles suggest, a “fairness” measure to put brick-and-mortar stores on a more even playing field with Internet merchants.

The legislation has been kicking around the Capitol for several Congresses, earning an extra few headlines late last year as lawmakers attempted to work the measure into the “fiscal cliff” deal.

But then, as now, congressional lawmakers have been too divided to get anything done.

“We have a problem with, it’s not only Republicans on this one,” Reid said. “We have more than enough to pass it. If I don’t get cooperation from a couple of senior members, I’ll do it without them.”

Nevada lawmakers have been discussing the potential power of an online sales tax since at least the 2011 session. Under a federal law, according to a 1992 Supreme Court ruling, states can’t demand sales tax collections from sellers not physically present in the state.

It is possible for states to strike deals with sellers independently, in order to collect sales tax on items sold to in-state residents. Last year, Gov. Brian Sandoval made such a deal with Amazon.com, estimated to be worth about $16 million once it takes effect in 2014.

But there’s more money to be made if, instead of cajoling Internet companies into collecting sales tax, Nevada could simply demand it as a matter of law.

Not everyone in Congress agrees.

To Nevadans, the online sales tax bill is a revenue-generating machine that could supply much-needed dollars for public services and Nevada’s education system.

To the representatives of several other states, especially those from states that have no sales tax, it’s an intrusion that threatens to sap entrepreneurs and stymie commerce.

“Online businesses should be a source of jobs, not a source of new tax revenue,” Republican Sen. Kelly Ayotte said this year. She is from New Hampshire, a state with no sales tax. “Our Internet retailers shouldn’t be forced to become tax collectors for other states.”

It’s not just Republican pushback: Oregon Democratic Sen. Ron Wyden, who also represents a state with no sales tax, joined Ayotte in opposing an online tax.

“Small online storefronts are taxed differently than big-box brick-and-mortar operations because they are different,” he said at the time. “A state can force an in-state store to collect and remit sales tax because that store benefits from state services.”

The Marketplace Fairness Act has 23 co-sponsors in the Senate and 42 sponsors in the House of Representatives. But even if lawmakers could build up those numbers, several hurdles remain before such a bill could become law.

Whether to green-light online sales taxation is one of those questions that is rarely addressed on its own in Congress. Like sales tax deductions and mortgage forgiveness tax relief, it is one of those items that the Senate Finance Committee, the House Financial Services Committee and the whole Congress usually considers in bulk, with other smaller provisions of the federal tax code.

“The big issues aren’t so much states being able to collect revenue,” said Bill Robinson, an economist with UNLV. “The big issues are, is there going to be federal tax reform? Corporate tax reform?”

If the fate of the online sales tax is pinned to the future of tax reform, that might not be the best news for those hoping to strike Internet gold in the Silver State.

Experts predicted that after the 2012 election, tax reform would emerge as the main issue occupying Congress’ attention.

But since the start of the year, Congress has been consumed by its own budgeting problems, most recently due to across-the-board “sequestration” cuts that will slice about $85 billion from the annual federal budget starting at the end of this month.

Before the sequester, there was the fiscal cliff — which settled some questions about income taxes, but barely addressed corporate income and tax deductions. Before the fiscal cliff, there was the debt ceiling deal. And before the debt ceiling deal — well, Congress has been going through various rounds of arguments over taxes and spending since the height of the recession.

As a result, tax issues have been largely tabled. And if Congress doesn’t work out its budgeting issues soon, they may be tabled again — until after the 2014 elections.

President Barack Obama held meetings with rank-and-file members of Congress last week in which he discussed areas where Republicans and Democrats could find common ground. According to lawmakers in those meetings, tax reform emerged as an area with serious potential — but only in a certain time frame.

“In all of the big-picture items … if it’s going to be effective, it’s probably (got to happen) by midyear,” Republican Sen. Jerry Moran said. “If we miss the opportunity in summertime, the likelihood of it happening diminishes.”

Earlier in the week, Reid’s spokeswoman Kristen Orthman didn’t have a better estimate for when a bill on online sales tax might come up — though she said it is one of the main issues Reid was hearing about from Nevada lawmakers.

The prognosis could frustrate Nevada lawmakers hoping to include new cash flow from online sales taxes in the budget they are building this session.

Experts stress that the health of Nevada’s economy depends less on the collection of Internet sales taxes than it does on broader tax reform taking place in Washington and Carson City.

“The tax code encourages corporations to do certain things; it encourages consumers to do certain things,” Robinson said. “Not getting started on those problems means that we’re not generating a lot of tax revenues in our state.”

At the federal level, several tax programs of particular importance to Nevada have not been permanently resolved.

“One (provision) that regularly worries us is whether or not we continue to allow the deductibility of sales taxes,” said Elliott Parker, an economist at UNR, referring to the provision that allows Nevada tax filers to deduct sales taxes on their federal returns.

“If you didn’t have the mortgage tax deductions, I’m fairly certain that would have a negative effect on home purchases,” said Eric Herzik, political science professor at UNR, referring to programs that give homebuyers a tax credit and underwater homeowners a tax waiver for refinanced homes. “Nevada’s economy is still in a sense, so fragile, that we need all the help we get.”

Under current law, those tax programs expire at the end of 2013. If they are not renewed, it could severely affect Nevada’s economy — and the state’s tax revenue — far more than the presence or absence of an online sales tax.

When people earn income, “they go and buy stuff, gas — and they pay gas taxes, taxes on products, on their homes, and that money filters through the economy,” Herzik said.

But when individuals are bracing for a heavy tax burden, there’s an incentive to spend less — leaving products unbought, keeping home prices low, and reducing state and local governments’ tax base.

Similarly, experts argue, there are larger pots of potential revenue to be uncovered at the state level. The expected $200 million from online sales taxes that would come with the Marketplace Fairness Act is equivalent to barely one percent of the state’s $17.9 billion fiscal 2012-13 budget.

“Regardless of what the federal government does, the Nevada tax code needs to be examined,” Herzik said. “With less disposable money, with easy credit now gone, people just don’t spend as much on gaming. We don’t do a very effective job taxing mining. We have the modified business tax — which is a stupid tax because you pay a tax on each employee — so there’s a built-in incentive not to hire.”

“Nevada’s whole tax structure needs to be looked at,” Herzik said. “But that’s a long-term process.”

CORRECTION: This story has been corrected to reflect U.S. Sen. Harry Reid's accurate quote about online sales tax. A prior version of this story attributed a quote from Reid on the online poker issue to the online sales tax issue. | (March 25, 2013)